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Analysis Private credit
The powers behind the loan
by Lisa Lee
Thought that Wall Street still pulled the shots in LBO financing? Meet the real power brokers of the new world order — the people who run buy-side capital markets desks at private equity firms
Behind the headline-grabbing leveraged buyouts, a cohort of professionals at private equity shops are dedicated to procuring debt financing for private equity deals. Individuals such as Matt Savino at Carlyle, Cade Thompson at KKR & Co and Kevin Sofield at Vista Equity Partners are quietly reshaping credit markets.
Back in the day, buyout barons called investment bankers to structure and raise debt for their purchases. First, they tapped Michael Milken and his band at Drexel Burnham Lambert. Later, they hired a who’s who of Wall Street banks as the high-yield bond and leveraged loan markets went mainstream and became trillion-dollar asset classes.
That’s now changing. Last month, Carlyle alone structured the USD 3bn loan package for its acquisition of Baxter’s kidney-care unit Vantive, according to two sources familiar with the matter. That was also the case for a USD 1.2bn financing for Worldpac, which included a private loan led by Oak Hill Advisors. Private equity shops have built out capital markets teams and they are calling the shots on how M&As and buyouts are financed.
“A talented capital markets partner can improve access, availability and structure of capital through relationships, creativity and flow,” says Alan Schrager, senior partner at Oak Hill Advisors, which lends to private equity firms. “They are a relatively unseen important component to the growth in private credit, but are even more essential going forward to the private equity firms, as they have many different financing options.”
It’s about consistency of relationship
Matt Savino
Carlyle 2017-present
Global head of capital markets
BlackRock 2010–17
Global head, alts sourcing
Co-head, global capital markets
Barclays 2008-10
Lehman 2004-08
Latham & Watkins 2001–04
Lawyer
Changing role of investment banks
Private equity firms do still work with banks. As recently as 2021, before M&A and LBO volumes took a dive due to spiking interest rates, arranging leveraged financing from capital markets accounted for nearly a third of fees earned by investment banks. Banks remain critical to private equity’s deal-making, especially since they are willing to put their balance sheets on the line and underwrite the debt that clinches transactions.
Still, increasingly there’s a new entrant that’s changing the financing game for everyone: private credit. When KKR wanted USD 5bn of debt for the buyout of health-tech company Cotiviti late last year, its capital market team, along with soon-to-be co-owners Veritas Capital, had a decision to make. They had the option to tap Wall Street banks to raise the sum from leveraged finance investors, or they could borrow from private credit firms via a direct loan.
Although KKR ultimately selected the bank path, this choice was nearly unthinkable two years ago. Private credit lenders simply could not amass enough capital to fund a debt deal of such magnitude.
“A significant change since I joined KKR in 2011 has been the exponential growth of private credit, which has become an attractive financing option for many sponsors and issuers,” says Cade Thompson, global co-head, debt capital markets, at KKR. “Over the past several years we have seen that market materially deepen and evolve. We maintain the view that market is here to stay alongside the broadly syndicated loan market. Having a private market that operates in parallel with a syndicated market benefits all.”
We have become more nimble in assessing which pools of capital are best suited to a given circumstance
Kevin Sofield
Vista Equity 2013-present
Head of capital markets
Goldman Sachs 1999–2012
Head of West Coast leveraged finance
US Navy 1991–99
It’s unlikely private credit could have grown rapidly — to the point where it rivals the size of the high-yield bond market — without hiring people like Thompson. Capital markets staff have been able to tap relationships with private credit shops to structure debt deals, negotiate terms and, when called for, put together syndicates of lenders.
When Blackstone and Permira led a consortium to take private eBay-backed classified ad company Adevinta ASA, the sponsor’s capital markets team dual-tracked the financing between a bank syndicated debt and a private credit offering. When banks weren’t willing to risk underwriting an all euro-denominated debt package, Blackstone and Permira turned to private credit for what became the largest European direct tranche for a buyout, according to sources familiar with the matter. The capital markets team pulled together a group of more than 20 lenders for the loan, without the aid of any advisors or investment bankers.
Similarly, when Vista Equity last year exhausted efforts to refinance about USD 6bn of debt at fintech company Finastra, in what was then a fragile leveraged finance market, it pivoted to the private route. Vista Equity’s capital markets team arranged the private credit deal on its own, employing relationships it had developed over a decade.
“We are focused on evolving our team alongside the market, which means we have become more nimble in assessing which pools of capital are best suited to a given circumstance,” says Kevin Sofield, head of capital markets at Vista Equity.
Rise of private capital
In little over a decade, what began as one or two individuals at the behemoth private equity shops has evolved into an industry norm. Almost all private equity shops of size have their own capital markets professionals, and many smaller ones have a similar function or are building one, according to market professionals.
The move is a change from the past, when large private equity firms would have many investment verticals and many investment teams, all interacting directly with a variety of banks and institutional investors.
This idiosyncratic approach wasn’t ideal for building institutional memory or avoiding conflict, says Carlyle’s Matt Savino. So the industry sought to develop expertise as private equity funds took off and changed the corporate landscape by taking over department stores, hospital chains, grocers and software companies on the way to commanding USD 5tn of assets.
“In short, debt finance is critical to maximising PE returns, so as PE funds evolve and grow they tend to prefer to have a team of people dedicating their time to the debt markets with a view to optimising capital structures, ensuring smooth deal execution, building relationships with key personnel at banks and credit funds, bringing specific market knowledge and streamlining process — so they’ve raided the banks for talent,” says Alex Robb, finance partner at law firm Ropes & Gray in London.
PE funds hired staff with similar backgrounds: investment bankers, particularly those at the leveraged finance group with experience in arranging high-yield bonds and leveraged loans. KKR’s Thompson and Vista Equity’s Sofield both learned their craft at Goldman Sachs. Carlyle’s Savino honed his skills first at Lehman Brothers and then at Barclays. There are exceptions, of course. Blackstone’s global head of capital markets Jonathan Kaufman, for example, did no time at an investment bank.
The right capital markets team can make a significant impact
Cade Thompson
KKR 2011–present
Global co-head, debt capital markets
Goldman Sachs 2004–11
Americas Financing Group
Bank of America Securities 2002–04
Wachovia Securities 2000–02
“The right capital markets team can make a significant impact on financing execution. Each deal adds up and can result in real value, especially across larger portfolios,” says Thompson.
Some in the industry believe wrangling the last basis point of advantage out of a deal isn’t the best way to operate. Savino says: “Under normal conditions we put USD 30-40bn of new supply in the market globally every year. We could think about a single deal, or we could think about what’s good for our firm and our funds in the totality. It’s about consistency of relationship. And I think an important component of that is transparency. When you have a real relationship, nobody is hiding the ball on their thoughts or playing out an option.”
That is never clearer than when buyout barons find capital markets shuttered and are stymied in getting financing for their deals. These are periodic occurrences, from the Great Financial Crisis, through the oil price crunch in 2015, to the rate spike era of 2022 and 2023.
For KKR, the Mills Fleet Farm LBO in late 2015 was illustrative. Unable to secure a viable underwriting on the debt financing, the KKR capital markets team employed their relationships to directly syndicate about USD 1bn of total debt — at that time a watershed moment for the industry.
Fast forward to 2022, and the Carlyle team was able to lean on its relationships and nab a USD 2.9bn debt package from private credit funds in May when the credit market turned volatile. Blackstone later that year wrangled a USD 2.6bn loan from a coterie of private lenders led by Goldman Sachs Asset Management and Sixth Street for a majority stake in Emerson’s climate tech unit, surprising a market which thought big financings were dead in the water. A few months later, when market conditions improved, and even before the loan was funded, Blackstone turned around and replaced the loan with bank-led syndicated debt.
What comes next
The size and breadth of capital markets functions are still growing. Some firms have teams that number in the double digits and range globally, from the US to Europe and Asia. Others, such as Blackstone, have included alternative offerings such as equities, project finance and derivatives. KKR has forged a relatively rare path. It is developing a fee-earning capital business, which ranks with the top investment banks, to service other private equity firms and third-party issuers. This arranges and syndicates financings, in addition to supporting the firm’s needs.
“This function is bound to keep growing, it is business critical and PE funds will keep ramping up in this space,” says Robb.
